Monthly Archives: June 2015

Economic Damnation 9: Oil & Gas Price Shocks

Take a look at the West Texas Intermediate Crude Oil Price chart for the last twenty (20) years over on Macrotrends.net. It’s bouncing up and down like a yo-yo. And any chart you pull up for international oil and natural gas prices is going to look similar. In the chart, we see oil goes from a high of about $38 in 1997 to a low of about $16 in 1998 to a high of about $47 in 2000 to a low of about $26 in 2002 and then a series of gradually increasing perturbations until it reached a high of about $145 in 2008 before it crashed down to about $43 in the same year. And so on.

In other words, within a one year period, prices can double or be cut in half without almost any warning. And either situation can run havoc with your supply chain. Let’s tackle the obvious situation first. Prices double seemingly overnight. Your costs are going up – if not right away, very very soon. If you have a contract, you might be able to insist that your supplier absorb the increase since they were, at signing, charging you higher than market cost since they were taking a risk over a predefined period. But, at some point, their margins go to zero, and soon after that, they are not going to put up with it anymore, especially if they are struggling financially. They are going to insist upon fuel surcharges, or simply stop honouring your contract and fail to pickup. Now, of course, you can try taking them to court, but in the interim, no shipments, no sales, and screaming customers which cost your organization much more than it could recover in a legal battle years down the road. If you don’t, you are buying on the spot market, paying 10%, 20%, 30% or more than expected for transport, eroding your margins, and possibly even losing on every delivery to your customers if you are working on thin margins to a competitive marketplace. You can either try to pass the costs on, and risk angry customers, or try to ride it out.

The non-obvious situation is when prices drop. Suppliers are the first to cry foul when prices increase rapidly but the last to insist on being fair when the drop. When was the last time they voluntarily dropped a fuel surcharge after fuel prices dropped back to the levels they were when they cut the contract to begin with? Never! You will have to spend a lot of time and effort to negotiate prices down to reasonable levels, and even more time tracking prices to benchmarks to know when you need to start those negotiations — this takes resources, and that costs money. This is a situation where you’re damned if prices rise and you’re damned if prices fall. It’s damnation all around.

And that’s just the short term damnation. If prices drop too much, the first thing the producers are going to do is pump less oil, reduce production, and wait until demand nears (and maybe even exceeds) supply, so that prices will start to rise again. In other words, as soon as you manage to successfully negotiate the price reduction, you’re only a few months away from the supplier coming back with a new surcharge request. The pendulum always swings and knocks you in the head upon every return.

It’s Official! Twitter Has Made Us Dumber Than Goldfish!

It’s official. Twitter, that will make a twit out of you, has now made us dumber than the average gold fish.

According to this recent article in The Telegraph, humans now have a shorter attention span than goldfish, thanks to smartphones. The article summarized a recent study by Microsoft that surveyed 2,000 participants and studied the brain activity of 112 others using electroencephalograms and demonstrated that the average human attention span has fallen from 12 seconds in 2000, when the mobile revolution began, to 8 seconds today.

And why are people checking their smartphones every 8 seconds? It’s not web browsing, that still doesn’t always work that well on a small screen. It’s not e-mail, that only polls the server and pulls e-mails down every 5 minutes at most. It’s not Facebook, people are always on it, but not posting every 8 seconds. It’s Twitter. New tweets in your feed every single second. Non-stop beeps for attention. And the 140 characters can be formatted to fit your screen exactly.

Congratulations Twitter. Thanks to you, we are now dumber than an average goldfish (which are believed to have an average attention span of 9 seconds).

I guess there’s nothing left to do except join in the chorus. I am the Twitter!

Purchasing Blues (Repost)

Editor’s Note: This is a repost of “Summertime Blues”, which was originally posted on June 20, 2009.

Well, it’s time to raise a fuss
and it’s time to raise a holler
About diminishing returns
from the corporate dollar

I just heard from my boss
who governs me
If I don’t save the cash
he’s gonna fire me

Sometimes I wonder
What I’m gonna do
If there ain’t no cure
For the purchasing blues

My CFO he told me to
go beat on the supplier
That his margins must be high
while ours are under water

So I talked to the supplier
he said costs were elevated
He was losing all his money
at the rates we had created

Sometimes I wonder
What I’m gonna do
If there ain’t no cure
For the purchasing blues

So I found a consultant
told her about my problems
And she went and discovered that
the supplier was just stalling

Material costs were falling
and the exchange rate was fair
I had wasted all my time
just pulling out all my hair

Next time I have a problem
I’ll find me a solution
I’ll find a sourcing expert
and get my retribution

No more will I wonder
What I’m gonna do
I’ll find me a cure
For the purchasing blues

Finding Your Procurement Mojo and Gettin’ Sigi With It!

As per my last post, my readers on the other side of the pond are probably well aware that Sigi Osagie’s Procurement Mojo has been available since late last year, but since Amazon UK had it well before Amazon USA and Amazon Canada, my readers on this side of the pond may not have noticed yet.

Procurement Mojo is an important book for many procurement professionals and organizations because it does not attempt to teach you what Procurement is, assuming you already know how to do your job, but instead attempts to teach you how to explain to the organization what Procurement does, which is a critical issue that needs to be addressed since

  1. Procurement is still the Rodney Dangerfield of the organization (and still don’t get no respect) and
  2. most Procurement Pros don’t know how to sell the organization on the unrealized potential that Procurement can bring.

The book addresses these issues by noting that the only way Procurement pros are going to be able to sell the organization on the true potential of Procurement and get the respect they deserve is to learn how to sell the Procurement brand. And this is what makes Procurement Mojo a great book. It gives you a how-to guide for building your Procurement Brand.

But before you build your Procurement Brand, as per our last work, you have to build the foundations — frameworks, process-based enablers, platform support, and good management. It takes time to get this all in place, but fortunately Sigi gives you a roadmap for this as well. In this post we’re going to discuss some of the key insights Sigi makes in the hope of encouraging you to check out his book and find your Procurement Mojo.

Sigi builds up to the plan to build your procurement brand by addressing

  1. building an effective organization
    because you can’t sell an ineffective one
  2. deploying process enablers
    people and platform powered
  3. managing the supply base
    because while you can fail on your own, you cannot succeed without
    the support of the supply base
  4. applying performance frameworks
    you have to measure, manage, and perform

We’re not going to dive into deals on how to do each of these tasks, as you can read them in the book, but highlight some key points on why these steps are important.

Building an Effective Organization

In many organizations, the average employee might not even know that there is a separate Procurement department — assuming that each department might do it’s own buying. It’s scary, but it’s true. And many of the employees who are sort of aware of Procurement won’t really understand what they do, believing they only buy office supplies, direct materials, etc. That’s why the brand is needed, but the chances of anyone taking notice are low if the organization is not effective.

And an effective organization is not necessarily one that does a lot of work, it’s one that appears to be effective. And this is often accomplished not by employing hard process and technology skills that allow the organization to do more, faster, but by employing soft processes that encourage communication, collaboration, and conflict resolution. That’s why effective organizations make sure that they have capability, rewards, and culture aligned with goals (not just processes and platforms).

Deploying Process Enablers

Once an organization does a competency assessment and gap analysis and identifies what it needs to get to the next level, the next thing it will have to do is deploy enablers, be they process or platform based, to get to the next level. But this doesn’t mean that they will employ “best in class” enablers. “Best in class” are not always best for your organization — it all depends on the maturity of the function and the need. Sometimes a good enough enabler, which is easy to use and understand and provides an immediate 80% to 90% return is much better than a best-in-class enabler which is difficult for a novice to understand, requires three times as much effort, and is avoided at all costs by the average employee.

Managing the Supply Base

Procurement is about maximizing the value chain — and suppliers are a vital part of that chain. You cannot succeed if they do not succeed. It doesn’t matter how great packaging and marketing in if the product or service is crap. It just doesn’t. That’s why relationship management and development is critically important and must be well in hand before you can focus on selling the brand (as they can tank your brand faster than an oil spill will tank an oil and gas company’s brand when the media has their frenzy).

Applying Performance Frameworks

That which is measured is managed, but more importantly, that which is not managed is a misadventure waiting to happen. As a result, appropriately defined frameworks must be in place to make sure the organization remains effective, deploys the right enablers, and nurtures the supply base.

And now that we’ve discussed the foundations we could discuss how you build your Procurement Brand and Sigi’s Procurement Mojo game plane. But since customers of Trade Extensions will have a chance to hear Sigi talk about Procurement Mojo live on October 7, 2015 at their customer event at Emirates Stadium in London, the doctor is not going to spill all of the beans on what Sigi says and what he thinks about it until then. But just like your favourite series comes back after summer hiatus, this series will return!

Why Is No One Using Big Brains?

Apparently one of the best presentations at Coupa Inspire earlier this month was a presentation by IBM on Procurement Transformation and Big Data. (Needless to say that this does not inspire the doctor.) Ouch! Big Data is good, but only if it’s a big bucket of relevant data, but that’s not usually the case. Usually it’s a big bucket of random data where only some of the data is relevant and the statistical relevance is low. This is bad because if an organization takes big data as gospel, it can be led down the wrong track. (And we’ll get back to this.)

And given the examples that the prophet is presenting in his post on When Watson Meets Procurement, the doctor is a bit worried. Why? Let’s take them one by one.

Parsing unstructured data to extract “soft facts” and information from news feeds and social media to line up against traditional risk management data feeds to drive a new level of supply risk management intelligence.

Okay, this is smart, because it can identify potential problems, but not necessarily all that useful. For example, let’s say it detects a few dozen instances of consumer unrest due to product defects. If the product is one with a warranty, chances are your customer service department already has a few dozen instances of warranty claims. No new information. Let’s say it detects a few hundred instances of consumer duress because one of your suppliers was using slave labour – but that resulted from a news story that was already picked up by your supply chain visibility and risk monitoring system. Nothing unexpected here. All you can really pick up on is general consumer sentiment, but only the consumer sentiment of the consumer base that is online, and, more likely, the consumer base that is unhappy with the product, since people who are unhappy are more likely to complain that people who are happy are likely to go online and give good reviews.

Ask Watson about Procurement that can leverage natural language processing to extract data buried in contracts, documents, and other organizational systems such as AP.

Okay, this is kind of smart too, but this is not so much big data processing but natural language processing and query formation as this is no different than implementing a meta interface that parses a query and translates it into a format that is appropriate for each system that may contain related Procurement data. Yes, the number of systems that could contain related information magnify the data magnitude problem, but since you can search separately and then only integrate relevant data, this is really not that much of a big data problem.

Build My Briefing, Watson that aggregates information about a Procurement entity (category, supplier, etc.) into an auto-generated deliverable for anyone who needs it (for sourcing, supplier review, etc.)

Okay, this is also smart, but not big data. This is just aggregating data from multiple systems and shoving it in a pre-built template. It’s just a reporting engine on steroids.

the doctor would like to see a good use of Big Data for procurement to solve a problem that could not have been solved otherwise, but he hasn’t seen it yet. The reality is that, as he has been saying for years, Big Brains Will Win in the End.